A commercial bridge loan is short term, interest-only financing that lets you close now and arrange permanent financing later. Terms commonly run 6 to 36 months, with rates around 7 to 13 percent and 1 to 3 points.
Estimate the payment and total cost of a bridge loan with our bridge loan calculator.
If you've been investing in commercial real estate for a while, you've probably heard the term "bridge loan" thrown around. Maybe you've used one. Maybe you've avoided them because you've heard they're expensive or risky. Maybe you're just not entirely sure how they work.
This article breaks down what bridge loans actually are, what they cost, and when they make sense for experienced investors.
A bridge loan is short-term financing designed to "bridge" the gap between where you're now and where you need to be for permanent financing.
The most common scenarios: You're buying a property that needs work before it qualifies for conventional financing. You're acquiring a property with a tight timeline and need to close faster than a bank can move. You're refinancing out of a maturing loan and need time to stabilize the property or find the right permanent solution. You're pulling equity out of a property for another investment and don't want to go through a full bank refinance.
Bridge loans aren't meant to be held forever. They're a tool to get from Point A to Point B, and they work best when you have a clear plan for what happens next.
Bridge loans typically have terms of 6 to 36 months. Most are 12 to 24 months. The payments are usually interest-only, which keeps your monthly cash flow requirements lower during the bridge period.
Loan amounts generally range from $250,000 to $40 million or more, depending on the lender. Loan-to-value ratios typically run 65% to 75% of the property value, though this varies based on the property type, location, and your experience as a borrower.
The underwriting process is different from a bank. Bridge lenders focus heavily on the property itself, its current condition, its potential value after improvements, and the strength of the exit strategy. They still look at the borrower's experience and financial strength, but the property and the plan carry more weight than in conventional lending.
Bridge loans cost more than conventional bank financing. That's the tradeoff for speed, flexibility, and the ability to fund deals that don't fit traditional guidelines.
Interest rates on bridge loans typically range from 7% to 13%, depending on the deal, the property, and the lender. Some may be higher or lower depending on risk factors.
Origination fees usually run 1% to 3% of the loan amount. Some lenders charge points, some charge flat fees, some charge both. Always ask for a complete fee breakdown before you commit.
Other costs to expect: appraisal fees, legal fees, title insurance, and possibly environmental reports or property condition assessments depending on the property. These are similar to what you'd pay for conventional financing.
Some bridge loans have prepayment penalties, some don't. If you expect to refinance or pay off early, make sure you understand the prepayment terms.
Bridge loans are the right tool when the higher cost is justified by the opportunity. Here are scenarios where they typically make sense:
The deal won't wait. You found a property at a good price, but the seller needs to close in 30 days. A bank can't get there. A bridge lender can. The extra cost is worth it to capture the opportunity.
The property needs repositioning. You're buying a property that's underperforming, low occupancy, below-market rents, deferred maintenance. Banks won't touch it until it's stabilized. A bridge loan lets you acquire it, do the work, and then refinance into permanent financing at a higher value.
The property type is unconventional. Churches, RV parks, mixed-use buildings, assisted living facilities, these can be great investments, but many banks won't finance them. Bridge lenders often will.
Your situation is complicated. Recent credit events, complex income documentation, multiple entities, sometimes your personal situation makes bank financing difficult even when the deal is solid. Bridge lenders can be more flexible.
Bridge loans aren't always the right answer. Here are times to think twice:
When you don't have a clear exit. If you don't know how you're going to pay off the bridge loan, don't take it. Hope is not a strategy.
When the deal only works with cheap financing. If your investment returns depend on getting low-cost bank debt, and you can't get it, forcing the deal with expensive bridge financing probably won't end well.
When you have enough time. If you don't have timeline pressure and you qualify for conventional financing, the bank loan will almost always be cheaper. Take the time to get the better rate.
Not all bridge lenders are the same. When you're evaluating options, look beyond the rate and consider:
Can they actually close? Some lenders quote attractive terms to get your business, then can't deliver. Ask for references. Ask about their funding source. Make sure they have the capital to close your deal.
How do they communicate? You're going to be working with these people for months. If they're slow to respond or hard to reach during the application process, it's not going to get better.
What are the real terms? Get everything in writing. Understand the rate, the fees, the prepayment terms, and any other conditions. Surprises at closing aren't fun.
Do they understand your deal? A lender who asks good questions about your property and your plan is probably a better partner than one who just quotes a rate without understanding what you're trying to do.
Questions about whether a bridge loan makes sense for your deal? We're happy to talk through your situation and give you honest feedback. Call 801-706-2802 or email info@bluridgefunding.com.
Alan is Managing Partner at BluRidge Funding and has worked in mortgage and real estate finance since 1996, with commercial lending as a principal focus since 2003. He holds an economics degree from BYU and a law degree from the University of Utah, and is a founding board member and former President of the Utah Association of Mortgage Brokers. More about the team.
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